Here’s another Wall Street bromide that needs to be retired: The need to pay lavish bonuses to retain the best talent.
Let’s define our terms here: In sports and the arts, the most talented performers are those with unrivaled raw abilities. They don’t always win or make money, but they set the individual standards that others aim for. And often, they delight.
There’s a lot of talent in business, academia, and the military. These are leaders who motivate others to do their best work, find ways to make strangers productive as a group, and create something valuable out of a bunch of raw material.
[See when the job and housing markets might finally bottom out.]
On Wall Street, the “talent” doesn’t come up with better ways to serve customers, or solve vexing problems, or create something new that people can use. Those deemed “talent” are the rainmakers: The ones with the most lucrative clients, the biggest book of business, the most profitable deals. This so-called talent is richly rewarded with bonuses, to make sure the fees they generate keep flowing.
Merrill Lynch just paid $4 billion in bonuses to its top executives – about $1.2 million apiece, on average – as a reward for …. helping Merrill lose $27 billion in 2008. If this seems outlandish, apparently you just don’t get it: At Merrill, there’s an outcry because bonuses are down one-third from the year before.
Most of the other big Wall Street firms that haven’t gone bankrupt paid bonuses in 2008. The average bonus was about $112,000. Bankers who survived the Bear Stearns flameout and went to work for JP Morgan Chase, the new owner, got especially big bonuses, even though $29 billion in government funds helped ink that deal. Other firms that got government aid, like Goldman Sachs and Morgan Stanley, paid nice bonuses, too.
[See why Obama's bailouts will look like Bush's.]
If your bonus wasn’t quite as juicy, and you’re feeling a little miffed, let me explain. The venerated bonus, you see, is longstanding practice on Wall Street. Rainmakers aren’t motivated by their puny monthly salaries, they’re motivated by a fat year-end payout that could be 10 or 50 times their base pay. It’s bad enough that bonuses fell by almost 40 percent this year, for those who still have jobs. It would be a terrible shame if an international financial catastrophe or the threat of insolvency interfered with the way these eminently talented moneymakers earn their living.
The presumption, of course, is that without these windfall payouts, the Wall Street talent would bolt for other firms, bringing their rich clients with them. So without their best performers, firms like Merrill would be left with … what? Only their worst performers? And then what? Losses of $50 billion? $100 billion? More government triage? Should firms this fragile even be in business?
Maybe not. So here’s a fresh idea: Let the talent bolt. Hell, encourage them to bolt.
What good is a roster of highly paid All-Stars if the company loses money – and can’t even survive without a federal bailout? (Answer: About as much good as the third-place New York Yankees in 2008.) If the rainmakers became free agents, any independent firm that’s not milking the government should be free to pay them $10 million, or $100 million, or whatever it wants for the riches they’d return to shareholders.
[Yes, there's a bright side to the bank bailouts.]
But would they? Let’s let the famed free market determine that. There are 20,000 unemployed bankers out there. Maybe a few cheap hires from the ranks of the Bear Stearns and Lehman Brothers leftovers would generate more return than one prima donna from Merrill Lynch.
Besides, if the multimillion-dollar bankers are so talented, they ought to be able to go start their own Wall Street firms, from scratch, without the overhang of toxic securities issued at the drunken heights of the housing boom. Maybe they’d start up new banks that will actually lend money. If they're really talented, maybe they'd go into other fields and solve some of the world's biggest problems, like cancer or petroleum dependence or poverty.
So call their bluff: No bonuses. If you don’t like it, go find a better deal someplace else.
At bailed-out banks like Citigroup, Bank of America (which now owns Merrill), GMAC, American Express, and dozens of others, the government could invoke its preferred shareholder status to insist that dearly departed rainmakers be replaced with team players: Capable executives who bear responsibility not for their own enrichment, but for the company’s revival. If they accomplish that, pay them lavish bonuses. And set a new standard for what constitutes talent.